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The Global
Business
Environment

Learning Outcomes
• explain the nature of the global business environment;
• understand and apply the PESTLE analytical framework;
• identify organizational stakeholders and construct a stakeholder map;
and
• analyse the impact on business of changes in the external
environment.

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Introduction
• We shall examine the global macro-
environment and the tools that firms use to
analyse it
• The external environment is changing
radically and becoming much less
predictable due to:
 the accelerating rate of
globalization;
 the information technology
revolution;
 the increasing economic and
political weight of countries such
as China, India, and Russia;
 international institutions like the
WTO and the EU becoming
increasingly important influences
on the global environment

The External Environment

• The external environment of the firm comprises all the external
influences that affect its decisions and performance.
• Such influences can vary from firm to firm and industry to industry
and can change, sometimes very rapidly, over time.
• According to many observers, the environment for international
business is changing faster than ever in two particular aspects:
• complexity
• turbulence.

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1. complexity
• Complexity relates to the increasing diversity of customers, rivals, and
suppliers, and of socio-cultural, political, legal, and technological
elements confronting international business.
• Complexity is increased by the forces in the external environment
continuously interacting with, and affecting, each other.
• An increasingly complex external environment makes it more difficult
for firms to make sense of, and to evaluate, information on changes in
the environment, and to anticipate their impact on the business. This,
in turn, makes it more of a problem formulating an appropriate
response.

2. turbulence
• The problems created by complexity are aggravated by the growing
turbulence of the environment.
• A turbulent environment is one where there is rapid, unexpected
change, in contrast to a stable environment where change is slow and
predictable.
• Turbulence has increased with the rapid widening and deepening of
the political, economic, socio-cultural, and technological
interconnections brought about by globalization and facilitated by
advances in telecommunications.

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Opportunities and Threats

• External environmental analysis will reveal the opportunities and the
threats in the environment.
• Opportunities are the favorable conditions in the environment
• Globalization generates opportunities for business to enter new
markets, take advantage of differences in the costs and quality of
labour and other resources, gain economies of scale, and get access
to raw materials

threats
• Globalization is also accompanied by threats that can have
devastating effects on business, causing long-term damage or even
leading to the collapse of the business. In the past, threats for
international firms tended to be seen as country-specific, arising
from:
 financial risks—for example, currency crises, inflation;
 political risks associated with events such as expropriation of assets by foreign
governments or unwelcome regulations; terrorist attacks and
 natural disasters such as earthquakes and tsunamis.
• As firms become more international, they become more vulnerable to
threats. E.g. dependency on global supply chain
• Threats for some firms and industries can be opportunities for others

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Scanning the Environment

• Big international firms spend time and
resources regularly scanning their
environment in order to identify forces that
will have a major influence on them
• All the firms will be sensitive to aspects of
the external environment that will affect
their ability to achieve their objectives,
earning profits
• This scanning of the external environment
is part of what is known as ‘strategy’, that is
the process by which firms arrive at
decisions about the direction the firm
should take.

Environmental scanning cont.;

• The strategic management has gone through several phases.
• In the 50’s and 60’s, when the external environment was much more stable, the
emphasis was on planning, with detailed operational plans being set typically for five
years ahead.
• Instability in the macro-environment in the 70’s made forecasting difficult and so the
emphasis changed from planning to positioning the firm in the market to maximize the
potential for profit using techniques such as Porter’s Five Forces. This became known as
the industry-based view (IBV), emphasizing that a firm’s performance was determined
by the macro- and micro-environment.
• In the 90’s, the emphasis shifted again from external analysis to internal analysis of
resources and capabilities in order to identify what was different about the firm and to
look at ways of exploiting those differences—the resource-based view (RBV).
• In the first decade of this century, change, is much less predictable and so there is now
increasing emphasis on flexibility and creating short term, rather than sustained,
competitive advantage often in alliances with other organizations

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Stakeholders
• The role of business in society has also been questioned after corporate
scandals. Eg, VW emission scandle
• This questions whether business exists simply to make profits for owners
(or increased shareholder value) or if there should be some wider purpose
in serving society. At the heart of this debate is the notion of stakeholders
• According to Dr. Edward Freeman (1984), a stakeholder is any individual,
group, or organization that is affected by or can affect the activities of a
business .
• Therefore, they have an interest in the decisions of the business, and
equally, it is argued, the determination of strategy should take into account
the actions and wishes of stakeholders.
https://www.youtube.com/watch?v=bIRUaLcvPe8

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stakeholders cont.; - The Stakeholder View

• Post et al. (2002), embracing the concept of the
stakeholder, put forward a new strategic approach to
managing what they called the ‘Extended Enterprise’
(see Figure 4.3).
• They stressed the role of recognizing stakeholder
relationships in managing wealth creation in today’s
complex ‘extended enterprise’.
• This approach recognized the futility of the
controversy between those who preached the RBV
rather than the IBV approach to strategy and that
both of those approaches ignored the socio-political
environment.
• This approach integrates all three aspects.
• It recognizes that a network of relationships exists not
just between the organization and its stakeholders
but also between stakeholders

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stakeholders cont.;

This idea of the extended enterprise, along with the industry

structure, provides a useful framework for assessing the impact
of changes in the external macro-environment on the structure
of the industry and ultimately on the stakeholders of the
organization.
This approach could also be used for assessing the impact of
particular courses of action or future scenarios. The
steps are:
1. Identify the macro-environmental issues.
2. Assess the urgency and likely occurrence of the issues.
3. Analyse the impact on the structure of the industry.
4. Identify the relevant stakeholders.
5. Identify the most important by assessing their impact on the
organization.
6. Assess the impact of the issue on each of the stakeholders.

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Stakeholders cont.; - Stakeholder Map

• One method of classifying the
importance of stakeholders is to map
them on to a 2 × 2 matrix according to
their power and their interest.
• Those with the highest level of power
and interest are the key stakeholders
and need most attention. Others will
need to be kept satisfied or informed.
• The position regarding stakeholders is
not a static one, and stakeholder
positions change according to the
situation. Firms involved in stakeholder
engagement keep up a constant
dialogue with their stakeholders

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Impact Analysis
• The impact analysis, when done early enough, allows firms
the time to consider a range of responses to exploit the
opportunities and defuse the threats. This helps
organizations recognize and adapt policies and strategies to
their changing regional, national, and global environments
• Kotler and Caslione (2009) claim that turbulence, with its
consequent chaos, risk, and uncertainty, is now the ‘new
normality’ for industries, markets, and companies.
• Globalization, together with communications technology,
mean the world is now more interdependent than ever,
meaning that change in one country can soon lead to
change in many others.

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Impact analysis cont.;

According to Kotler and Caslione, the factors that can cause chaos are:
• the information revolution - the cloud technology etc.
• disruptive technologies and innovations
• the ‘rise of the rest’—a rebalancing of economic power around the world; for
example, from the West to China and India;
• hyper-competition—a situation in which competitive advantage is short lived;
• sovereign wealth funds—trillions of US$ owned by states such as China,
Singapore, Abu Dhabi, and Kuwait and available for overseas investment
purposes, increasing the role of some states in other economies;
• the environment—and especially the need to preserve scarce resources and deal
with the effects of climate change; and
• consumer and stakeholder empowerment gained through the information
revolution.

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Scenario Planning
• Given that forecasting and prediction become ever more unreliable in
turbulent and chaotic times, one way of anticipating or being
prepared for change is through what is known as scenario planning.
• Scenario planning is an approach to thinking about the future, looking
at stories relating different possible futures so that strategic
responses can be considered and managers better prepared to deal
with the issues

https://www.youtube.com/watch?v=srY-hJuqYTM

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The Macro Environment

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Political & Legal

• The political and legal environment is made up
of the various political and legal systems under
which business operates.
• Political institutions, such as governments and
parliaments, pass laws and establish regulations
that shape the legal environment within which
business operates.
• The courts, the police, and prisons ensure that
the laws are enforced and lawbreakers are
punished
• Some industries need to pay particular
attention to their political environment because
they operate in a very politically sensitive
sector, eg. Energy
• Companies also have to take account of the
increasing importance in the political and legal
environment of international institutions like
the WTO, the EU

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Economic &
Financial
• The economic and financial
environment comprises
forces that affect large areas
of the economy, like the rate
of economic growth, interest
rates, exchange rates, and
inflation, and the policies of
domestic and international
institutions that influence
these economic variables.

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Socio-cultural
• The socio-cultural environment is
concerned with the social
organization and structure of
society.
• This includes many social and
cultural characteristics, which can
vary significantly from one
society to another.

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Technology

• Technology refers to the expertise

or the pool of ideas or knowledge
available to society. Business is
particularly interested in advances
in knowledge that it can exploit
commercially
• Technological advance has been a
fundamental force in changing and
shaping the patterns of business as
regards what it does and how it
does it.
• However, technology involves
much uncertainty.

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Ecological • There is growing pressure on the political authorities to

respond to these ecological threats

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